From April 2020, the off-payroll rules which already apply to contractors engaged in the public sector will be rolled out to medium and large sized private companies.
This will see responsibility for determining whether an engagement falls within IR35 rules shift from the worker’s personal service company (PSC) to the engager (the business which requires the worker’s services).
Where the rules do apply, the responsibility for applying the appropriate tax and National Insurance contributions will fall on the engager or agency which pays the worker’s PSC.
Over the past few months we have seen many larger organisations taking action to remove any risk of retrospective application of the revised IR35 rules by terminating all contingent worker contracts prior to the go-live date in April.
This draconian approach has had dramatic implications for the contracting market in certain industries leaving many contractors unsure of their options and putting many under financial pressure.
We detail below the common scenarios and solutions for contractors experiencing this client-lead squeeze, from those which hold cash reserves, to those who have technically become insolvent and are potentially unable to settle liabilities when they fall due.
In these unprecedented times it is important to recognise that these large organisations have workstreams that will certainly require skills and knowledge outside those available in house, It would be absurd to think these companies will not be engaging with contract workers indefinitely post April, as one senior recruiter puts it “the contractor market will come back….”.
Post April, the online CEST tool should be used to identify the contract status, HMRC have stated they will stand by that status determination, removing any ambiguity and potential legal and taxation issues down the line.
Termination of Contract – What Happens Next?
Offers of alternative Contracts
Many end clients are proposing alternative arrangements to their Limited company contractors post the contract termination date.
It is essential you understand and have advice around the impact, both in the short and long term, should you accept an offer, we have listed a few items to consider.
Alternative Contracts – Things to Consider
- Excluded from contracting back to the organisation*
- Reduced take home pay from same gross
- Sick Pay
- Holiday Pay
- Benefits package
- Exclusion of claiming Travel and Subsistence
- Notice Period – prevent return to contracting
*working as a permanent employee at an organisation may preclude you from returning as a Contractor. seek advice.
- All downside of permanent position but none of the upside
- You may be liable for the employers NIC as well as the Employees
- Back to market and only accept contracts outside of IR35
Limited Company Scenarios
Having decided a course of action post termination, you now need to review the options and requirements with respect to your limited company.
If you intend to contract in the future and your company is solvent, able to pay its liabilities when they fall due, you may wish to keep your company active.
You will need advice to ensure efficiency across both personal taxes and corporate taxation. This will include reviewing:
- RTI Payroll and salary levels
- Dividend policy
- Dormant Status
- VAT Registration and filing
- Allowable costs
- Corporation tax prior year claims
If you are not planning a return to contracting in the near future and your company is solvent and has cash reserves you need to consider options around winding up.
There are many aspects to this process, it is essential you receive qualified advice to ensure optimal results, typically this will be allow you to gain access to Entrepreneurs Relief, a 10% tax rate for capital distributions. In recent times ER has been fettered and achieving the relief requires carefully planning and execution.
Generally, the winding up of a solvent entity will follow one of the following routes:
DS01 Strike Off
If you company has reserves less than £25,000 it may be possible to follow a simple strike off process post preparation of statutory filings to the cessation of trade date.
A claim for ER can be successful on distributions up to £25,000 if structured correctly, however with the dividend rate being 7.5% in the basic rate, it can be preferable to structure distribution of reserves as income, especially if straddling two tax years.
Advice and planning is essential.
Members Voluntary Liquidation [MVL]
An MVL is the preferred route for winding up a solvent company with significant reserves.
Only a qualified and registered insolvency practitioner can perform an MVL, and a successful winding up via this route requires planning, sometime two years in advance, as well as a close interaction between the IP and accountant to ensure all aspects are prepared in accordance with the planning and legislation.
This route can provide distribution of reserves as capital, potentially split across tax years and where possible ‘husband and wife’ providing an extremely tax efficient exit with access to entrepreneur’s relief and the capital gains annual exemption of £12,000, per person, per tax year.
Again, it is essential you engage a qualified accountant who has in depth knowledge of managing company exits via MVL.
Creditors Voluntary Liquidations [CVL]
It’s an unfortunate but not uncommon scenario that many contractors, having had their seemingly long-term contracts terminated, have now been put into a position of insolvency.
If you find yourself in this position, it is essential you take action as soon as possible as demanded under the fiduciary duty imposed on you as a Director of the company.
You should look to contact an accountant who is capable and familiar dealing with insolvency issues, this may not be your existing accountant, especially if you have utilised an ‘online’ provider.
In broad terms insolvency can be assumed when the company is unable to meet its liabilities when they fall due or the company’s liabilities are greater than its assets.
Should you continue to trade, incur expenses or extract funds personally from a company that is deemed insolvent, you could face serious penalties including a criminal prosecution.
Taking prompt and decisive action is essential in achieving palatable results under a CVL.
We work closely with clients and our insolvency specialists to ensure the winding up of an insolvent limited company is fair and where possible will allow the directors to continue to trade unhindered in the future.
Manged correctly this process can extinguish all corporate liabilities and give a director the opportunity of a fresh start. This process is a corporate insolvency so will not appear on personal credit files.
It is essential you speak to a knowledgeable accountant as soon as you become aware of solvency issues. You will have more options of resolution if you tackle the problem early and head on.
There are many options when dealing with a ‘termination of contract’ scenario, most significantly around the management of the associated limited company.
There are combinations and permutations of the options outlined above which will be bespoke to your situations, which will allow you to continue to trade in whichever guise is preferably or available in the present climate, under the most favourable terms.
Now more than ever it is essential you have the support and input of a qualified competent accountant to guide you through these challenging times.